The Importance of Proactively Selling Your Real Estate Portfolio

Most investors are focused on building their portfolio and fail to place enough attention on how those properties will eventually be sold. For scattered-site portfolios consisting of single-family homes and smaller two- to four-unit buildings, which make up a large percentage of individual investors’ portfolios, the exit can be far more difficult and tedious than most account for.

I was recently contacted by an investor who seemingly did everything right. She purchased 10 buildings containing 14 units, primarily in stable C-class neighborhoods. The portfolio includes a mixture of Housing Choice Voucher and private-pay tenants, and there is no debt on the real estate. She is now in her 70s and understandably wants to sell everything in one transaction. Many of these properties experienced meaningful appreciation between 2015 & 2020.

The convenience is obvious: one buyer, one closing and no need to coordinate multiple vacancies, renovations and sales. My concern is that convenience is serving as the tail that wags the dog. The discount required to sell the portfolio as a package will far exceed the expenses she is trying to avoid.

Who is the natural buyer for a $3 million-plus portfolio of 10 scattered buildings? It is too large for most smaller investors but far from enough scale or operational efficiency to attract larger or institutional buyers. If the properties are spread across several neighborhoods, that further narrows the buyer pool.

The highest price for many of the individual properties will likely come from an owner-occupant or smaller local investor. Those investor buyers generally purchase one property at a time, and owner-occupants are often interested only after a property has been vacated and freshly renovated. This is especially true in C class neighborhoods.

Selling separately is more tedious. It may require waiting for leases to expire, strategically vacating certain units and completing sale-ready renovations, particularly for the single-family homes most likely to attract owner-occupants. After years of ownership, many investors are simply tired and ready to move on. Unfortunately, that fatigue can lead to the irrational decision making process this owner is considering: accepting a substantial discount because there are so few natural buyers for the portfolio as a whole and too worn down to invest the time and energy to maximize the outcomes of individual properties.

The broader lesson is that owners of scattered-site portfolios should begin planning their exits well before they are ready to sell. They need to recognize when it makes sense to sell proactively and opportunistically. That means periodically identifying which properties are best suited for owner-occupants, which should be sold occupied to investors and when market conditions create an opportunity to sell individual assets. Using this 14-unit case study as an example, it would have likely made sense to begin winding down the portfolio in 2020-2022 when rates were historically low, and properties had just achieved meaningful appreciation. 

 After spending years building equity one property at a time, investors should not allow fatigue and the desire for a convenient exit to leave a large portion of that hard-earned equity on the table. It's important to understand the natural buyer for your real estate and be proactive with dispositions to avoid the case study scenario I shared.